IPO Lock-Up

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DEFINITION of 'IPO Lock-Up'

A contractual caveat referring to a period of time after a company has initially gone public, usually between 90 to 180 days. During these initial days of trading, company insiders or those holding majority stakes in the company are forbidden to sell any of their shares. Once the lock-up period ends, most trading restrictions are removed.

Also referred to as "lock-up period".

BREAKING DOWN 'IPO Lock-Up'

An IPO lock-up is done so that the market is not flooded with too much supply of a company's stock too quickly. Typically, only 20% of the outstanding shares are initially offered to the investing public. A single large shareholder trying to unload all of his holdings in the first week of trading could send the stock downward, to the detriment of all shareholders.

There is also empirical evidence suggesting that after the end of the lock-up period, stock prices experience a permanent drop of about 1-3%.

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